There’s a big difference between accidentally claiming your child and criminal tax fraud.
I often hear the question, “Will I go to jail if I cheat on my taxes?” People see celebrities go to prison all the time, Richard Hatch, the guy who won a million dollars winning “Survivor”was been all over the news for awhile for tax evasion. He spent four years in prison. Note: if you win a million dollars on national television, it’s safe to assume that the IRS knows about it and is looking for it on your tax return. Other celebrity tax evaders include Wesley Snipes, Darryl Strawberry and Willie Nelson. (And the list goes on and on….)
But what about EIC fraud? What happens to you when you claim a child that’s not yours, or if you allow someone to claim your child when that person isn’t the parent? What’s the punishment there?
If the IRS examines your return and finds that you cannot claim EIC, the worst case scenario would be that they impose “civil fraud” penalties on your return. The penalty for civil fraud is 75% of your underpayment of income tax.
Say for example that you involved yourself in a scheme where you claimed children that didn’t belong to you over the course of three years. The difference between what you received as a tax refund averaged $5,000 more each year than if you didn’t illegally claim those children for a total of $15,000 in excess refund dollars. When the IRS catches up with you, they will demand their $15,000 plus another $11,250 for the penalty which would make your balance due $26,250. Add to that the interest you’d be charged and you see how costly this is.
What makes this even worse is that if you are charged with civil fraud the IRS can then turn the case over to the Criminal Investigation Division for prosecution. You could face both civil and criminal penalties at the same time—meaning they put your butt in jail, levy your bank account and put a lien on your house and any other property you own.
Most people who get caught for EIC fraud don’t have the money to pay back the tax owed, not to mention the added fines. And of course, the higher the dollar amount owed to the IRS, the higher the likelihood of criminal charges. So you really don’t want to hear the word “fraud” if the IRS comes calling.
But that’s the worst case scenario, fraud is pretty dangerous stuff, and they have to be able to build a case for it. One of the key points of fraud is that you knew you were doing it. I once spoke to a potential client over the phone, she had received an IRS letter and they were charging her penalties for fraud. As she explained her case, she kept insisting that “she didn’t know.” I thought there might be a case for her so I asked, “You mean you didn’t know it was wrong to claim someone else’s child?” She said, “No, I didn’t know I could get caught.” That’s not going to get you off of fraud charges. I gave her the name of an attorney—if there’s a possibility of criminal charges, you’ll want the tax attorney over the EA or CPA. (EAs and CPAs have client privilege for tax issues only, for criminal cases, only an attorney has privilege—meaning what you tell them, they can’t tell on you.)
In most cases though, a much more likely scenario is an accuracy related penalty—that would be 20% of the under-reporting. Let’s say you live with your girlfriend, she has a kid, she said you could claim the kid; you don’t know it’s illegal but you get caught. You’ll have to pay back the EIC plus the accuracy related penalty. If the EIC difference was $5000, then you’d add another $1250 making the balance due $6,250. The IRS would add interest to that as well.
Generally, if you lose an EIC audit, you’ll also be banned from claiming EIC for somewhere between 2 and 10 years depending upon the severity of the case. That’s probably the worst penalty for most people. Many of the people who get in trouble for EIC generally are able to claim EIC in other years. Being banned from EIC for 10 years can cost a person over $50,000. That’s a lot of money.
Accuracy penalties usually involve amounts of over $5,000. If your EIC under-reporting is less than that, you’re more likely to pay “late payment” penalties which are equal to ½ of one percent per month. For example, you file your return in February of 2008, in March of 2010 they catch up with you. This means that the penalties have been adding up for 24 months, you’ll pay 12% for the penalty, plus the interest owed. Let’s say you only got an extra $1000 for falsely claiming EIC, you’d have to pay back $1,120 plus interest of course. The IRS will always get their interest payment.
But what if it’s not my fault? That’s a very common question. What if it really isn’t your fault? What happens if you went to a preparer that didn’t know any better and claimed EIC for you when she shouldn’t have. Or worse, you had a crooked preparer. (These things really do happen.)
You’ll have to report the preparer. There are serious fines and penalties for tax preparers associated with EIC negligence and fraud. The smallest, yet the easiest to prove, is the EIC due diligence paperwork. For every tax return that has EIC on it, a paid preparer must have a form 8867. Here’s a link to see what it looks like: http://www.irs.gov/pub/irs-pdf/f8867.pdf
The link is to the official IRS form. In my office, my computer software actually uses the same form but I’m required to sign it and have my client sign it as well basically stating that everything on the EIC form is true. Here’s the thing—the IRS can call up any tax office at any time and say, “Hey, we’re coming to audit your 8867 EIC forms.” As the owner of a tax business, I have to be able to pull them all and have them ready for inspection. If I don’t have an 8867 form for every EIC tax return I prepare, its $100 for each one I’m missing. Guess what, I’m not going to be missing any of those forms. I can’t afford it and I don’t prepare that many EIC returns. You can bet that an office with lots of EIC returns has itself covered in the forms department.
So here’s where I’m going with this, if your preparer really is crooked, do report him to the IRS, it’s the right thing to do. But if you lied to your preparer about your relationship to the child you claimed or some other EIC offense, and the IRS goes to the preparer’s office and pulls the 8867 forms, and they find a signed affidavit with your signature saying that you are the actual parent of the child—now you’ve just proved that you committed a fraud. That’s the last thing you want to do. Remember, a plain error costs a lot less than fraud and there’s no jail time involved.
So what should I do if I receive an EIC audit letter? If you have the rightful claim to EIC, fight it. If you’re not sure, maybe you do, maybe you don’t—seek professional help. I’ve seen innocent people lose EIC audits because they didn’t know the rules. Don’t take chances, it’s too costly. If you know for a fact that you should not have claimed a child, pay up and get it over with as quickly as possible. It won’t be easy, but in the long run it will be better for you.
If you know that you’ve illegally claimed EIC, don’t wait for the IRS to come after you. File an amended return and pay the tax. You’ll definitely have to pay interest, but by filing an amended return and paying before you get an IRS letter, you have a very good chance of avoiding the penalties. You’ll probably sleep better too.
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Here are some links that might help:
EIC questions of any kind: http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-%E2%80%93–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.
How to find free tax preparers: http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers
How to find your local IRS office: http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1
@Michelle,
The bottom line is that you know what was wrong and you tried to fix it. If you do get charged penalties, you’ll want to ask for an “abatement of penalties”. The IRS will usually grant that if you haven’t had tax problems before. It’s possible they won’t even attach any penalties since it was caught before April 15th.
Yes I did work actually. Before I got your first response I amended both of our taxes. I may have jumped the gun and delayed the process more but I am scared that I am getting my brother in trouble with this. I honestly did not think it was a very big deal but reading everything i see online, it appears to be a big issue.
Hi, I have a problem with my income tax return I have been claiming my son for the past 3 years until this year me and my ex claim him this year at the same time without her giving me any notice that she was gonna do that now I get a letter from the IRS saying there gonna hold the refund until they review the tax return. I know for sure that my ex already got her refund since she did it before me so what should I do in this situation?
A message for Concerned:
If a person has commited EIC fraud–but hasn’t been caught yet, the best course of action is to amend the tax return and pay back the tax owed. Better to amend and pay than to get caught and get hit with all the penalties.
Hi Brandi,
Sorry this is so late. If your fiance has already received a letter, he shoud wait and find out what the IRS says/wants etc and go from there.
I’m responding to some old posts that hit an inbox but I didn’t get them in my regular posts. Sorry these are so late:
First to Melissa–the reason I said it’s too late to amend after the IRS contacts you is because that’s what the IRS just said to me recently. Now I have amended returns, but generally, if the IRS is working on the return, there’s no need to amend–they’ll do it for you.
Next, to Chi Chi–
I think you’re going to need some help. You need a body to help you scout this out. I’m guessing that someone paid you under the table and then they were getting audited and so they issued a 1099misc to cover their behind.
I would amend your return, arguing for not being self employed. If you received the funds. If you haven’t received funds–you might be a victim of identity theft. You might want an identity theft expert help you with this.
Hi Nicole,
It sounds like your children’s father has a legitimate claim. You don’t want to give him an 8332 form if he’s claiming EIC. The 8332 form means that you have the kids and you’re letting him claim the dependency exemption and the Child Tax Credit.
Since he’s claiming EIC–no 8332 form should be filed. I wouldn’t try to amend. I would work to prove that the kids have been with him. There’s got to be something. If they’re sleeping over there–who sees them? A neighbor? A landlord? Who can vouch for him? Just because you don’t have the school records doesn’t mean you need to roll over and say die.
Hi Keena,
It sounds like your sister claimed her own children. You’re probably going to lose this case. Sorry.
Hi Ebony,
If you had the children for over 6 months–it sounds like you should be okay. Your sister being homeless is a pretty compelling argument in my book. If the IRS denies your claim–I’d appeal.
Hi Sarah,
Technically, you cannot claim a child for EIC if the parent is able to claim the child. I think you might have a problem because your sister should have claimed her own children.
But, you might have a chance. If you’ve really supported the children and lived with them for over 6 months, you might win–the thing you’ve got going for you is that you really are their blood aunt.
So, get your papers together. Show that the children live with you, that you’ve paid the bills, that they go to school in your district. You might actually be okay.
At least you have a decent explanation–if you do lose you should be able to get out of the penalties.
Hi Michelle,
I’m wrong–it’s your brother, not your boyfriend. This might not be so bad. A brother may be able to claim EIC–the big issue is–could you claim your son? Did you have any income? If not, then he should be okay.
hi.. i took care of my nephew for six months and my sister agreed to let me carry him on my taxes. She is telling me to pay her a certain amount and i refused. I have gotten auditted for my nephew and since i refused to pay her anything, she will not give me the information to clear my audit.
court docs of my sisters eviction
my sister was evicted from her apartment in 2011. my niece and nephews lived wiht me until nov 2012. she allowed me to claim them for 2012. the irs red flaged my return and the sent me out a letter of everthing in need to send. my niece and nephews records have her old address for school and dr. because she was evicted. i sent the irs her court docs medical and school records. birth cert socials and my sister wrote a letter. do you think thats good enough
Sarah,
I don’t know if the IRS will catch your sister or not. It all depends on if someone turns her in or not.
Hi Chelsea,
That’s why you always want to read your tax return before you sign it. There’s been a lot of fraud with the American Opportunity Credit. Since you got caught–you are more likely to be audited in the future. The IRS likes repeat business. If you’ve claimed the AOC again, you’ll definitely hear from them.
The IRS may hold up your refund if they’ve already processed the audit. If they haven’t, you’ll get the money and you can use it to pay them back.
Hi Michelle,
Since he got caught it’s too late to amend your boyfriend’s return. Once the air clears, then you can amend yours. The IRS will adjust your boyfriends return.
Jenna,
How shall I put this delicately? For the past 10 years you haven’t worked. You’ve been claiming that your kids live with you to get food stamps and assistance. At the same time your ex claims the kids live with him so he can get EIC. The country is suffering from a huge deficit and you’re asking me if this is okay?
Seriously? He’ll probably get away with it this time, but I’m guessing that either someone turned you in, or the government started checking records. Don’t be surprised if you get a notice about your food stamps.
Please let me say i think its great that you taking the time to advise us unadvised people. I have quite a problem here and would love to hear any advise. I have two children with the same man and we pretty much have them an equal amount of time. Im on ssdi so he has to step in alot. Of course he files the kids every year and of course he spends the money to help take car of them. However this year they are reviewing his return for eic and he thinks its me out to get him. I gave him the right to claim them however i didnt enclose the 8332 for the child tax credit. And what does the eic mean ive done some reading well our kids really could go either way for claiming purposes ( or at least we though so i guess im not sure) he does have the higher agi as well. However in reading online they want proof well we dont change address everytime our kids go to the others house so really there nothing to back him up. To amend or not Hummm . Im just sick of him asking about it and would like something to tell him. He says the irs is not saying anything and he should he something by april 15th.
i claimed my sister 3 kids on my return this year because she only worked for 3 months in 2012 and i’ve been taking care of them financially and lived with them for well over 6 months. She agreed to let me claim them since i give her money to buy diapers, clothes, and other things that the kids may need. We thought it would be fine since i lived with them for more than 6 months, i financially support them, and i claim them as my nieces and nephew. Last week, i went to go check on the status of my refund on where’s my refund website and it says that they have received my returns and it is being reviewed and that i will received a notice within 30 days requesting for more information. what does that mean? am i being audit? what will i need to do? and oh yeah i received part of my returns but not the eic. advice on how should i handle this please? i am freaking out about it.
Hi Jes,
If you want to report tax fraud check out this post: http://robergtaxsolutions.com/2010/11/how-to-report-tax-fraud/
Hello, I am in the same boat as many of the people above I believe. My brother and I live together with my 4 year old son. I let him file as head of household and claim my son as a dependant because he pays back the yearly 500 homebuyers credit. He did get some EIC as well. Now, as we all know they are seriously cracking down on EIC claims. His taxes have been pulled for review and although we have not gotten a letter I would assume its for EIC. Can we amend his taxes and just add my son back to my taxes? I understand there may be fines but can we go ahead and just amend them and mail them in?
I just got a letter that says that i owe $2,418.31 to the irs because it says they have disallowed the american opportunity credit i looked this up online and it said it was an education credit. That year i was not in school but my tax guy asked if i wanted the max refund and i told him as much as i can legally and he added that onto my taxes…without up front asking me but i signed a letter saying that everything that he was fileing was true …what can i do can i just pay the amount i owe ? and also if they find that i lied for the 2010 year will they audit me again for 2012 tax year?
also will i get this years taxes if i dont pay for this first …i want to use this years taxes to pay them
my sister has no kids but was claiming eic of other folks kids for 4 years straight between 2006 to 2010, when she realized she was breaking eic rules and that she could get in trouble she stopped claiming eic in 2010. Will the irs eventually audit her for those years she claimed eic she wasn’t entitled to?
I am facing a similar situation as some people above. My son and I live with my . I let him claim my son on his taxes because he pays back the yearly 500$ homeowners credit. Now his refund is under review and he’s waiting on a letter. Can I amend his taxes and send a letter in or something? Last thing I want is for him to be in trouble. Do I also amend mine to add my son?
Hi Dave,
well for one thing–no matter what this is not a “jail” type of offense. Thought I’d get that out just in case you were worried.
Now it sounds to me like you’re fine claiming the exemption in 2014, but all you have for 2012 is her word at the courthouse.
You probably have a problem proving your case. Sorry.
Hi John,
Here’s a post to help with reporting tax fraud: http://robergtaxsolutions.com/2010/11/how-to-report-tax-fraud/
Hey Tameka,
I don’t think the IRS will “forget about it”. I’m guessing that they “amended” your return. But it’s probably worth checking out what’s on your record. You’re probably a likely target for future audits (you know the IRS, once they “like” you, they tend to keep coming back.)
It’s worth a phone call anyway.
I have not worked for the past 10 years. My ex-husband has. We’ve been divorced for 12 years. Each year he claims the kids on his tax return. It’s never been a problem until this year. He received a letter that they were going to hold his tax return until they could review it. The letter was a CP05.
He is the dad of all 3 kids, his name is on their birth certificate. And, it was his understanding that he could still claim the kids as long as no one else could claim them on their taxes.
They have not lived in his for 6 months…However, we are trying to work things out so he’s either at my house or we are at his.The only time he’s not with us is when we come home to go to sleep or when the kids are in school.
He says that he had to write a statement that the kids were with him last year. Technically that is true. But I received food stamps and medicaid for the kids. He’s not listed on our case.
The tax agency says not to worry that he should receive the check in a week or two.
What does he need to do? Did he do anything wrong?
I’m going to current situation right now that I need some advice on maybe you can help me my fiance had been taken to court over child support issues that was resolved in the father of the child being told that going through with this he would end up paying her 20 dollars in child support every month for 2 kids because we split up the days about 6 months apart
When the conversation was brought up to the Clerk of the Court who was seeing what was going on with the case in having them come to an agreement my fiance spoke up and said well I would rather pay 100 dollars in child support to him and give him 100 dollars a month to make sure that my kids have their medication and their healthcare taking care of the clerk of the court said wow that’s very giving of you and in doing that we will word you to be claim one of your children on your taxes for 2014 and to continue until he is 18 the case was settled everything was agreed upon and was also stated that if he wanted to let her claim him on taxes this year he could he stated to her in front of the courthouse that she could claim on taxes he was working full time and everything else and everything was supposedly copacetic and she said okay I’ll claim this year you don’t have to tell me twice so we went ahead and filed our taxes as soon as we got our w2 forms taxes were filed on the third of February and yesterday i.e from the date this was posted we get a phone call from his new wife who is trying to file taxes and says that we weren’t supposed to file Kenny on her taxes she said that’s what you said that we could do at the courthouse and now she is demanding that we file an amended return what happens if we don’t file an amended return thank you for your time
I know someone who has commited irs EIC fruad what can I do about that? Can I report them
.I know a person who are filing eic and the kids arent theirs – can i report this to the irs?
IF you carried a child that is not yours and get audited and you never got your money, but you knew you was wrong and dont worry about sending in the proof because you know you cant prove it. Will the IRS forget about it cause you never proved it. Or what will happen
i think the poster was named lisa and it was from last year and even though she was being questioned you did tell her to amend her return right away so can i do that same?
i noticed that you had responded to someone else in an earlier thread that when they were getting a notice from the irs that they could amend their return regardless and take off the dependents in question so why can i not just amend my return for this year and take off the dependent since i cannot prove i can claim him?
Hi jan, the issue is that I never had a business and do not kno where this is coming from. The lady at the IRS told me that like 3 years ago I was self employed and made like 3,000$ . I told her it wasn’t possible. But now I got this letter for this payment for this license, that I don’t have. How can I get rid of future bills for this? And how can I get it canceled. I don’t know what to say to them because I don’t want to get in trouble for something I didn’t do. Please help. Thanks
Jason,
Let me be blunt–your brother used you for income tax fraud. Sorry, that’s what it is. You’d better contact the IRS, fess up and get your return fixed.
Hi Amanda,
You can claim that you are self employed and pay your own self employment taxes.
Hey Felipe,
You may claim a dependent with an ITIN number but you will not get EIC for that child. Be sure that you really have a right to claim that child as a dependent–there have been many scandals involving people claiming dependents with ITINs. It’s been all over the news and the IRS has been investigating them.
It is perfectly legal to claim a dependent with an ITIN–just make sure you are claimng a legal dependent.
Hi Theresa,
You can report them. I suspect the IRS will catch up with them soon enough.
So Melissa,
You claimed someone who left and you have no idea where he is? So did he even live with you for 6 full months? Does he qualify in anyway for you to claim him?
Since you’re already been caught you will not be able to amend, they’ll do it for you and charge you the taxes and fines.
Hi Mark,
To claim that you supported your parent, you would have to provide more than half of her support. So, if she gets $10,000 of social security then you need to give her more than $10,000 of support. If you’re not doing that, then you should amend your return and take her off.
If you are caught, you could pay up to a 25% penalty plus interest in addition to the tax difference.
Hi ChiChi,
If you don’t have a business–well then you don’t need a license. You need to tell the city people that. If you do have a business–well then you need to pay for the license. It’s that simple.
If you’re claiming self employment on your tax return–you have a business and you’ll need to pony up for the license.
Irene,
The financial penalties for claiming a refund that is not yours depends upon how high the dollar amount of your claim is. There is a “failure to pay” penalty–that amounts to 5% per month for 5 months–that caps at 25%. There is of course interest–and that is tied to the market rate. If the amount of money you receive is over $5000–then there is the civil fraud penalty and that’s an additional 20% of the amount of the money in question.
Usually, the actual parent isn’t charged with criminal fraud–but if you do get charged with criminal fraud, there are prison penalties.
Ok i made less than 3000 last year cleaning houses for a friend, she is under the impression that if i claim to make more than 1800 she will have to pay taxes instead of me paying them… is this true? because i made more than that and if i get the eic im entitled to than i will also pay in my taxes im supposed to, but will it fall back on her??
I have a question. My brother needed to use my pc to do his taxes and was going to do mine also. I told him to wait till i was home to do mine so i can make sure things were right.
Well, he didn’t listen to me and went ahead and did mine anyways the day he did his. Which isn’t a big deal as he found a little more for my return then i did when i tried doing it, but he went and put his 2 kids on my tax form as dependants.
I did live with them 6 months, but he was the head of household, paying their bills. He did not ask me ahead of time if he could do this, for my permission, or anything and just did it. He even used his bank account for the depisit cause he didn’t know mine. Said he’d give me what i was owed if i didn’t claim kids, which he did give me.
I found out the next day and he said he ckecked it online and said it was legal, but i’m not so sure. Now i got a letter from the state asking for more information on schooling and why parents didn’t want to claim the kids, Got me worrying. He’s my brother and i love him but i dont wanta get in trouble if he shouldn’t have done this, but i also dont want him to be in any trouble either.
Hi, i know someone who’s been recklessly claiming EIC for the past 5 years, will the irs eventually catch them or should i report them?
my eic is being reviewed for this year. i claimed my half brother. due to montana law i cannot get his birth certificate because i dont have power of attorney, am not a spouse, parent or child of his. (he isnt married and no children) i dont know where my half brother is, he left and went somewhere in oregon and our dad is out of the picture. then i found out i was being reviewed for the eic. im gonna wait on the papers to make sure that is what it is. if that is what it is, i dont have proof of the relationship so can i amend my return at that point and take him and the eic and head of household off?? should i wait for the letter first and then call and tell them that is the situation and ive amended it and amend it?
i got a letter in the mail from the city treasurer saying that i have an amount due for for a business license tax. i dont have a business license nor have i ever had one or owned a business. the amount is very small but the point is if i call them and tell them that i dont have a license will i get in trouble for it. Because im afraid they will think i lied about having one, when i didnt. it also says business licenses are due by 1/08/2013, and penalty and interest will be charged after that date., i dont even know what that means?.its past that day.
what should i do? i dont want to get in trouble and i dont want to keep paying for something i dont have. Please help.
Thank you so much for answering back. I feel like the govt is not concerned with my child’s situation. I am an American citizen and feel as though people who aren’t citizens have more rights than we do. The only other thing I know I may can do is go to the social security office and apply for my son a new social security number. But I have to wonder if the irs doesn’t care if my sons number has been stolen and repeadtly used will the social security office care enough to even change it? I feel like my son is stuck and he’s only 9. I don’t know where to even start on something like this. Thanks do much.